Paying tax under self assessment Under self assessment, you usually pay income tax in three instalments. The first two are payments on account of tax due for the current tax year. These are based on the previous year. Each payment is half the tax (and Class 4 National Insurance if you are self employed) due for the previous year, less tax paid by deduction at source. You then pay the balance of tax due to make up the right total for the year by 31 January following the tax year end. If you have paid too much tax ‘on account’, you will get a repayment. So if the tax (and National Insurance) due on your profits for the year to 5 April 2007 was £3000, you will make payments on account in respect of your profits for the year to 5 April 2008 of £1500 by January 31 2008 and £1500 by 31 July 2008. Your tax return for the year 2008 gives the information to allow the correct tax to be worked out. If the tax due is more than the amount you have paid on account, you will have to pay the balance by 31 January 2009. If your income is lower than the previous year, you may have paid too much on account, and be due a refund of tax. You will usually have to make payments on account if you are self-employed, or have substantial rental income or investment income on which higher rate tax is due. If 80% of the tax for the year (apart from capital gains tax) has been collected by deduction (on employment income or pension, from bank or building society interest, dividends etc), you will not need to make payments of tax on account for the next year. There is also no need to make payments on account if the total tax and National Insurance contributions due under self assessment for the last year were not more than £500. You can apply to reduce your payments on account if you know that your income has gone down from the year before. You can do this on form SA 303. For example you may have received a large payment on which further tax is due, such as a redundancy payment liable for higher rate tax. This may trigger a demand for payments on account for the following year. You should apply to reduce the payments to zero if you know this was a ‘one-off’. You need to be careful about reducing payments on account. If you get them reduced, and then your income increases so that the tax for the year is as much or more than the original payments on account, you will have to pay interest on the difference from the date the payment on account was due.
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